Financial Adviser: 5 Trading Tips Every Investor Should Know to Make Money in the Stock Market
Investing in stocks can be a great way to build wealth over time, but it is important to understand basic trading techniques in order to maximize your chances of success.
Whether you are a beginner or an experienced investor, learning the right techniques can help you reach your financial goals.
Basic trading rules state that before you decide to buy stocks, it is important that you have a general view of where the stock market is going.
If you think that the market has already bottomed out and it is good time to invest, you need to decide on the size of your investment and the amount of loss that you are willing to take.
Once you are invested, you should expect the stock price to move in your favor and if your trade become unprofitable due to reversals, you should also be ready to cut your losses and exit the market.
Many people make the mistake of holding their losing investments for too long until it becomes very painful to take the losses.
Without the proper mindset and emotional discipline, it is difficult for an investor to make an informed decision especially during market volatility.
Here are some essential trading techniques every investor should know to be in the control of their investments and make money in the stock market:
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1| Apply fundamental analysis with price action
It is true that stock prices are reflections of market emotions as determined by demand and supply. When there is more demand than supply for a stock, share price tends to increase just as they tend to fall when there are more sellers than buyers.
But when you combine this with the fundamental analysis, you can have a profitable trading strategy. Knowing how much the stock should be valued can give you the confidence you need on when and what price you should take your profits.
For example, AllHome Corp (PSE: HOME) was the most beaten-down stock last year, losing over 80 percent in one year—from P8.39 per share at the start of 2022 to just P1.31 in December.
But the financial performance of HOME would show that the overselling was driven mainly by sentiment, rather than fundamentals.
If we priced HOME based on its current assets minus all its debts last December, we would derive a net-net value per share of P1.42 per share.
At P1.31 per share, HOME was trading at 7.7 percent less its net-net value of P1.42 per share. It was like buying HOME at 7.7 percent discount for its net current assets only and taking all its fixed assets for free.
When HOME started to rally in late December, buying the stock with the fundamental information in mind will give you a sense of margin of safety, while riding on the momentum.
HOME has rallied by 58 percent since December 14 from P1.31 per share to P2.09 per share today. Will the stock correct soon?
Combining your fundamental information that HOME’s book value at P4.00 per share gives you 47.7 percent discount to its current share price.
Even if the stock doesn’t reach this price, given the momentum of the price trend, you can use the book value as your reference.
The other way is you can use the average market premium over net-net value at two times so you can roughly set HOME’s target price at two times its net-net value of P1.42 per share at P2.84 per share.
2| Learn to ignore the noise in price movements
Stock prices will always have small ups and downs, which we call correction.
If a stock is trending upwards, you can expect that there will aways be sellers who will be taking profits so that the share price will fall temporarily.
But as soon as the stock has reached a certain price level, there should be buyers who will come and support. For as long as the trend direction is kept intact, occasional corrections should not shake you out to sell your positions.
One way to determine this is by looking at the price charts where you can draw the trend lines. Trend lines are essential in identifying whether a stock is on upward or downward trend.
Trend lines are drawn by connecting two or more historical price points and extending that into the future. For as long as the stock moves along the line, the trend remains intact.
These trend lines also serve as support and resistance. If a stock is on an uptrend, the line holding the price points is called “support” while if the stock is on downtrend, the trend line above it is called “resistance.”
When a stock breaks resistance or support, a shift in trend can be expected. The change in trend signals a change in demand and supply for a stock. Such a change can be a minor or major correction.
3| Avoid buying stocks in a falling market
Don’t try to be a hero. In a falling market, buying stocks after a huge drop in its share price and hoping for a quick rebound may result to large losses. This is what we call “catching a falling knife.”
While it is nice to buy stocks that you think have suddenly become bargains because of aggressive sell-down in the market, you should also not get into the game too early.
More often than not, a huge price drop is normally followed by more selling in the following days. It will be better to sit down and watch the stock price to fall further before you begin to bargain hunt.
Again, you can use the price charts to accumulate stocks based on support levels as your reference. You can also combine it with fundamentals to guide your price target.
An example of this case is the recent fall of PLDT (PSE: TEL). Last December, the stock lost 12 percent in just one week—from P1,748 per share to P1,541 per share, breaking critical support at P1,600.
If you are follower of TEL, you would think that this stock was a good buy, but the stock continued to fall the next day to P1,478 and even lower the following day to a low of P1,192 per share.
At this point, the stock may have become very attractive already, but negative sentiment on the stock due to the controversy of its capex overruns pushed its share price even lower to P1,130 per share.
If you caught the stock at P1,478 per share, which was near its historical support, you would have lost by 23.5 percent in less than one week.
4| Know how to add positions in winning trades, not losing trades
There is a saying that the trend is your friend, until it bends.
The idea of buying a stock is to be patient through the minor corrections in the price movements until you can identify the point when the trend has changed its direction.
If you think the trend is moving strongly in your favor, you can choose to buy more shares of the stock from time to time, preferably in a pyramiding fashion, where you buy more shares in less number as the stock price goes up.
This is equivalent to slowly averaging up your cost as you take advantage of the trend and wait for it turn before getting out of the winning position.
However, if the trend is going downward and you have a losing position, you should not buy more shares to average down your investment cost.
Sure, you can lower your cost but if the stock is weak, you will just be risking more of your investments because the trend may continue to go down.
One best approach to this situation is to cut your losses based on your stop-loss target to avoid further losses. Again, you can refer to the changes in trend by looking at the support and resistance levels of the stock.
5| Do not attempt to get the high and low of a stock
There is no holy grail in stock market trading. Success in trading needs discipline and commitment.
You need to monitor price action daily to spot potential price patterns for trading opportunities. Timely trading that captures early buying or selling signals is the key to succeed.
You don’t need to trade at all times. Trade only when there is a good opportunity.
Always consider your time horizon when you invest. If you intend to trade for short-term gain and your strategy failed, try to have the discipline to cut your losses unless you really intend to make it your long-term investment.
Trading can be a source of excitement for some people. But be aware that frequent trading in general can lead to losses. This is because of the trading costs that can accumulate over time.
There are hundreds of patterns and charting techniques that you can learn and use in your trading, but you only need to master a handful of them that can fit your investing style.
If you feel that your techniques are no longer effective or you need to improve your skills, you can always research and learn from experienced traders.
Henry Ong, RFP, is an entrepreneur, financial planning advocate and business advisor. Email Henry for business advice hon[email protected] or follow him on Twitter @henryong888